The Tax Burden of Typical Workers in the EU 27

The purpose of this study is to compare the tax and social burdens of salaried employees in the 27 Member States of the European Union and, in doing so, determine a “tax liberation day” for individuals who are working in those countries. In addition, the study tracks year-to-year trends in the taxation of labour.

Numerous studies rank political systems by various measures of “economic freedom”. While valuable to economists, the aggregate data in these studies fails to shed light on the working individual’s role in financing their state and social security. In addition, many think tanks determine an annual “tax freedom day” for their countries. Unfortunately, conflicting approaches to this calculation make cross-border comparisons difficult. This study aims to create an “apples to apples” comparison of “real tax rates”, with data that reflect the reality experienced by real, working people in the European Union. Further, it serves as a guide to the true cost of hiring employees in each state.

Main results

Typical workers in the European Union saw their average “real tax rate” rise again this year, from 44.89% in 2012 to 45.06% in 2013. The rise of 1.07% since this study series began in 2010 is, to a large extent, a consequence of VAT increases in 16 EU member states 43.4%.

Belgium is ranked as the European country which taxes the labour in the higher rate. In fact, an employer in Brussels now spends 2.52€ (0.07€ more than a year ago) to put 1€ into a typical worker’s pocket –and that worker’s tax liberation day is August 8. In opposite to Belgium, Hungary established a flat tax system since 2011 offering considerable tax relief for workers. Its tax rate of 16% has brought that country’s tax liberation day forward by 22 days over three years. Many of the purported benefits of flat tax rates have been proven true. Their simplicity facilitates compliance.

Their low, “not-worth-the-crime” rates have prompted many underground dealers to emerge as “legitimate” businessmen. While providing tax relief to typical workers, they have also been successful in increasing overall tax revenues. The flat rate is, after all, only a flat income tax rate. Social security contributions in these countries are far higher than in progressive systems. Moreover, 5 of the EU’s 6 flat tax countries (all except Bulgaria) have raised VAT rates since 2009, with Hungary implementing two increases totalling 7%.

Methodology

An individual’s Real Tax Rate can be counted as following:

Social Security Contributions + Income Tax + VAT Real Gross Salary

This percentage of 365 determines the Tax Liberation Day, the calendar date on which an employee (beginning work, in theory, on January 1st) would earn enough to pay his annual tax burden.

2013 Tax Liberation Day Calendar

Country

Month

Day

Some country notes

Belgium

In 2013’s “tax liberation day” for Belgian workers falls three days later than in 2012. In March 2013, the Di Rupo government announced plans to reduce debt to 100% of GDP by selling state assets, cutting spending and – of course – raising taxes.

Czech Republic

On 01 January 2013 the Czech Republic abandoned its flat tax regime in favour of a “twobracket” system. The 15% flat rate of income tax still applies to gross earnings below CZK 100,000 (approximately 3,885€) per month; a rate of 22% is applied to higher amounts.

Italy

Italy’s VAT rate rose from 20% to 21% at the end of 2011 and will rise to 22% on 01 July 2013. Thus the typical Italian worker will pay 21% for the first half of 2013 and 22% in the second half. In this report, consequently, we show 21.5% as Italy’s VAT rate.

Slovakia

Slovakia also called an end to its flat tax regime and, like the Czechs, implemented a “twobracket” system. The 19% flat rate of income tax still applies to gross earnings below 39,600€ per year; a rate of 25% is applied to higher amounts.